Thursday, May 07, 2009

How to Understand the Disaster - The New York Review of Books

No one can possibly know how long the current recession will last or how deep it will go. That is because the dangerous combination of the "real" recession—the unemployment and idle productive capacity that come from lack of demand—and the financial breakdown, each being both cause and effect of the other, makes the situation more complex, more unstable, more vulnerable to psychological imponderables, and more distant from previous experience. Whenever the US economy returns to some sort of normality, or preferably before then, it will be necessary to improve and extend the oversight and regulation of the financial system. The main goal should be to make another such episode much less likely, and to limit the damage if one occurs.

To make progress in that direction requires some understanding of the origins of the current mess. I once saw a hospital discharge diagnosis that read "sepsis of unknown etiology"; that sort of thing will not help in this case. The need is not only for a clear picture of what happened but for an assessment of the motives and actions of the main players, the causes and consequences of what they did, and the ideas and institutions that encouraged, inhibited, and shaped the outcomes. Richard Posner's book is intended to fill that need, in clear and understandable language. I think it is at best a partial success; it gets some things right and some things wrong, and the items on both sides of the ledger are important.